Monday, July 24, 2006

Hong Kong & the brave new world

John Mauldin's weekly E-letter, dated June 22, 2006 and entitled, "Goldilocks or Micawber?", brings us the recent thoughts of the GaveKal research team. What interests me about this latest missive is the section that is found under the heading, "Honk Kong Adapts to the Brave New World".

The authors begin their topic with a brief discussion of Hong Kong's recent tax debate. They believe that by looking to move towards a consumption tax model, Hong Kong's government is demonstrating its ability to think and adapt to new economic realities. The GaveKal team then outlines a future in which individuals and companies migrate towards low-tax/efficient service jurisdictions that will compete for their "business".

As an increasing number of companies move to the 'platform-company' model, or as people leave the big companies to work for themselves or smaller entities, it is likely that the top talent will want to work (or at least be taxed!), in low tax environments.

This economic reality should lead to a structural decline in tax receipts in the countries which do not adjust to this new model. In the new world towards which we are rapidly moving, income taxes will becoming increasingly voluntary and governments will have to get their pound of flesh through property and consumption taxes instead.

This is good news. Over time, it should lead to more efficient (i.e., downsized) governments all over the Western World. The platform company business model should end up killing off the Welfare State.

Reading this, I am reminded of some of the arguments presented in The Sovereign Individual, by Davidson and Rees-Mogg. The competitive government scenario, imagined by both sets of authors, seems to contradict the prevailing trend towards international unification on all fronts (common currencies, legal and political framework, armies or "peacekeeping forces", etc.). Or maybe these types of jurisdictions are encouraged to create their niche, given a world of oversized, tyrannical government.

It would be nice if this proved to be a triumph of the optimists. More than that, it may be essential to ensure any meaningful existence of liberty.